With the global economy stagnating, a variety of fresh warning signs that suggest that Europe could enter a recession, and an economic slowdown from China that has sent shivers throughout emerging market economies, which have seen a decline in exports, investors are buying up bonds in droves.
“This is one big trade,” said Gregory Faranello, head of U.S. rates at Amerivet Securities. “The momentum and trends that are in place right now are pretty steadfast. There’s nothing glaring to me that will change the dynamics right now. We’re in the latter stages of the summer months. Liquidity is definitely an issue. When you look at it globally right now, it encompasses a lot of different, diverse things. Today we have the headline from the U.K.; you have this ongoing trade war, and this global yield structure just continues to unfold.”
Prices, which move inversely to yields, have been dropping for sometime. The benchmark 10-year Treasury note yield, which affects virtually everything from business loans to home mortgages, has been embracing three-year lows, reaching 1.45% Wednesday. That’s below the 2-year yield of 1.5%, and the move has been signaling recession, since the yield curve inverted recently.
“The disaster scenario is if yields fall dramatically from here,” said Michael Schumacher, director rates at Wells Fargo. “Hypothetically, if the trade situation intensifies, if maybe Hong Kong goes badly and Brexit seems like it results in a hard exit … then what you probably get is a massive rally again in Treasurys.”
While there are a number of factors driving rates lower, the trade war is a key component of the move.
“Clearly, the trade war is such a big piece of this and it remains so incredibly unpredictable. Most people feel like it’s elevated to such an extent that it’s highly unlikely to get anywhere,” said Ralph Axel, rates strategist at Bank of America Merrill Lynch. He said people are wondering why China would sign a long-term deal with President Donald Trump ahead of the election.
Investors who want to allocate toward safety can gain exposure to Treasuries through various ETFs, such as the iShares 7-10 Year Treasury Bond ETF (IEF) for an intermediate-term focus or something like the iShares 20+ Year Treasury Bond ETF (TLT) for later-dated Treasuries exposure.
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